Did anyone else think that article/excerpt ended a little strangely? First, this investor is set up as an authority figure in bear markets, then it reports where his current trajectory is headed, at which point the article abruptly ends.
Gold bugs have been ramping up their rhetoric during the last decade, and during that time period, the data have shown that gold is strong against the USD. However, the way the article reads, and particularly the way it ends, verges on scaremongering of the sort that can only reinforce the very investments described in the article.
I agree with you about the abrupt ending but I think it's because the article was adapted from an upcoming book ("The Greatest Trade Ever" by Gregory Zuckerman).
Weird editing, but maybe the purpose was to make it abrupt enough that people who want to go get the book to figure out what happens next.
>Mr. Pellegrini added a "trend line" that clearly illustrated how much prices had surged lately. He then performed a "regression analysis" to smooth the ups and downs.
one of the biggest lessons here is really how he actually shorted those mortgages. He created a situation where the downside was relatively limited. Some people balked at his potential 8% loss on the trade, but it also meant that he was not betting the farm on the trade. At the same time, he had this great optionality in place. If what he predicted did happen, the fund would profit hand over fist, and it did.
If you look at the people who profited from the crisis, they all did a similar play. It was not shorting stocks, it was taking advantage of mispriced insurance.
And after the crash, he formed a fund buying up distressed debt and junk bonds (which did quite well this year).
His main investment shown by some filings is a pairs trade of long dollar long gold, which is a very interesting position as noone seems to be taking the long side of both those assets at the same time.
Can anyone see what the value these traders add to the market? It seems so perverse that they can earn so much money while creating so little value.
And the financial industry is essentially allowed to bet on funds that don't exist (unbacked insurance), safely knowing that the government will print cash to help pay these imaginary sums should disaster happen.
of course there is value. Do you know anyone who benefits from a pension fund or endowment? Well-- those guys benefit from someone like Paulson who can profit when the market tanks.
But let's go broader.
You are looking at capital incorrectly. Let's say you are given money from investors for your start up. Eventually though, your start up begins to tank. Competitors are coming in, you are just not good enough, and any incremental reinvestment in the start up will likely yield negative returns. Is it really wise of you to squander your investor's money like that? No.
You would be better off parking that capital where it will generate returns (i.e.: a financial investment) or giving it back.
Warren Buffett was confronted with this prospect when he took over Berkshire Hathaway, a failing textile mill. Textiles were rapidly going overseas and Buffett had a choice to make. He could take the business' cash flow and buy new equipment, to try to compete. Or he could invest it elsewhere. He chose to invest it elsewhere and look where Berkshire is today: $10K invested back then would be $50M today.
Sometimes investing in the business is the wrong choice, especially when you have a responsibility to your investors.
Investing in derivatives like CDOs is completely different from investment in equities.
Its like if I sold you insurance for $999 trillion that there wouldn't be an earthquake in California tomorrow. I obviously don't have that much money, just like those banks didn't have the money that they are now paying Goldman Sachs and the guy in this article with taxpayer money.
Ironically you cite Warren Buffet when he himself was quoted as saying "I view derivatives as time bombs".
Also, note that during the 2008 AGM Warren Buffett remarked that a small canadian insurance company had profited from credit default swaps, and mentioned that they aren't all that bad.
He was referring to Fairfax Financial, a company I myself invested in over 2 years ago with the intention of hedging against sub-prime:
Fairfax was likely the ONLY insurance company to protect its shareholders from the financial crisis and profited immensely. They were able to use the CDS investments to profit and then sold and reinvested in equities.
Next time try arguing with better facts than an arbitrary quote.
Look at the date of that article, it is from April. Go see what the S&P 500 has done since then (Hint: it is up 22%).
Meaning, the mark to market loss that those derivatives at will have already narrowed quite a bit. He still has a ways to go, but so far things appear to be in his favor.
Also, remember that it is a paper loss, he still has not paid anything out. So he still gets to put those premiums to work in the market, given his recent performance on his warrants w/ GS and others, he is doing quite well.
I don't know why you keep wanting to "win" and talking condescendingly to me as though you have some personal stake in this argument when its readily apparent that you are not correct.
Can you go see what the S&P has done since that press release you cited? (Hint: its down 27%).
Now I'm not saying that you can't make a bunch of money on derivatives. Let's stop arguing about this.
The fact is that derivatives is about as moral as gambling except that you can gamble imaginary sums and the government will step in to pay with tax payer money because Goldman Sachs owns the Fed and the banks are "too big to fail". Even Warren Buffet has admitted that they are bad, and its not just one random quote.
Just because he is joining the club doesn't mean that derivatives have stopped being bad, it only means that he can't fall behind the other investment vehicles.
> Its like if I sold you insurance for $999 trillion that there wouldn't be an earthquake in California tomorrow. I obviously don't have that much money, just like those banks didn't have the money that they are now paying Goldman Sachs and the guy in this article with taxpayer money.
You're correct about this point. If you sold that insurance and couldn't pay off when the earthquake happened, the bank should take all that you have and eat the remainder. (For "bank", read Goldman et al.)
However, note that the folks selling the insurance in these cases included pension funds, small cities in Australia, and the like. I'm perfectly happy with them losing everything (especially since the alternative is US taxpayers paying to make Goldman whole), but are you?
Except Goldman didn't eat the remainder. They told the government to bailout AIG, and AIG used that money to pay 100% of their obligations to Goldman Sachs.
However, note that the folks selling the insurance in these cases included pension funds, small cities in Australia, and the like. I'm perfectly happy with them losing everything (especially since the alternative is US taxpayers paying to make Goldman whole), but are you?
Yup. My investment in GS is 0 and I live in the US.
Right about now, someone is typing that the AIG pass-through wasn't a subsidy/payoff to Goldman because Goldman was owed that money and had bought "insurance" from third parties.
According to what authority? Just because you can buy insurance on debt both parties don't even own (simply ridiculous), doesn't mean that the contract wasn't between AIG and Goldman.
Every news article and writeup has said that there were many CDOs between AIG and Goldman.
As long as they don't punish everyone else by deflating the currency, they can sue each other just like any other industry.
Think about this. What other industry can you bet imaginary sums of money and have the government print it for you when someone cashes in?
In every other industry I can think of, if the money doesn't exist, tough luck. It someone can't pay you, they declare bankruptcy and you either get their assets or have them pay the debt for the rest of their life.
Is this about whether they add value, or destroy it?
In this case:
"Some investors later would argue that Mr. Paulson's actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices."
Gold bugs have been ramping up their rhetoric during the last decade, and during that time period, the data have shown that gold is strong against the USD. However, the way the article reads, and particularly the way it ends, verges on scaremongering of the sort that can only reinforce the very investments described in the article.